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Tag: robo-advisors for millennials

The word is that Robo-Advisors are good for your financial health. Why? Because they offer similar services as the human kind of financial advisor at lower cost. If you’re paying less in management fees, your returns are higher, your portfolio fatter. That’s the dominant sales pitch. And with the nascent industry growing from $16 billion (USD) under management in 2014 to more than $160 billion today, there’s reason to stop and look at what a Robo-Advisor may do for you.

Financial Giants Muscling Into The Game

As retail investors flock to Robo-Advisors (i.e., software programs using mathematical algorithms to generate investment advice and manage your portfolio), pioneers like Wealthfront and Betterment must now compete against big boys such as Charles Schwab, TD Ameritrade, Vanguard Group, and Fidelity Investments.

And the bandwagon keeps growing. Bank of America activated Merrill Edge Guided Investing earlier this year, Morgan Stanley announced that they’ll be launching Morgan Stanley Access Investing in the fall, 2017, and Goldman Sachs is gearing up to introduce its own Robo-Advisory services.

In Canada, several independent firms (i.e., WealthSimple, QuestTrade Portfolio IQ) offer Robo-advisory services with Bank of Montreal being the only bank having a firm foothold. With momentum and money on the side of robots, it would be surprising if Canada’s other big banks didn’t roll out their own Robo-Advisor in the next year to secure their slice of this particular money pie.

How Does It Work, This Robo-Advisor Thing?

Robo-advisors are a third option for investing; doing it your self and full service financial advisory services being the other two options.

Robo-advisors are convenient (24/7 online access) and more accessibleand affordable than hiring a financial advisor (you often need a minimum of $100,000-$250,000 to retain the services of a financial advisor; as for Robo-advisors, some do not require a minimum balance to open an account, others are as low as $500).

Depending on the specific Robo-advisor, they offer different degrees of automation: fully automated or a hybrid set up offering access to old fashioned humans for an additional fee.

Hype or Substance?

Despite impressive growth of Robo-Advisors in a relatively short period of time, $160 billion is no more than a few drops in a financial industry bucket worth somewhere around $20 Trillion. Still, this niche is expected to continue growing thus more players entering the market.

So … should you bite?

That depends.

If you have less than, say, $100,000 for investing, and you want some guidance, then definitely give it a go.

If you prefer interfacing with computers rather than humans, again, Robo-Advisors are for you.

If you’re currently working with a financial advisor and are not entirely satisfied with the value they bring to the table, then consider opening a Robo-Advisor account to see if it better suits your needs (this may include intangibles other than fees such as guiding you on debt reduction issues, divorce, house purchase, loans, estate planning, and any other financial issues not directly related to investing).

Well, what if your advisor places you in passive funds? They’re still charging you 1 or 2 points. Why pay high fees when an effective Robo-advisor portfolio may be built for less than half the cost?

Back to value, let’s give a little more space to fees.

Depending on your robot of choice, we’re talking management fees in the neighborhood of 0.25 – 0.50% for a Robo-Advisor.

Compare this to financial advisors of the human variety who typically charge between 1.0 – 2.0%.

Seems like a small difference in fees? It’s not. Fees matter.

Consider a simple example: your portfolio is worth $500,000. Fees are 2%. Total fees for the year equals $10,000. For simple illustration purposes, if your portfolio remains at $500,000 for 30 years, that’s $300,000 in fees paid. Compare that to 0.5% fees that results in annual fees of $2,500. After 30 years, the final tally is $75,000. Either way, that’s a whole lot of dough toward fees but the 75k is much more palatable than 300k.

Of course, you could slash fees even more by avoiding both humans and robots. Instead, open a discount brokerage account, buy exchange traded index funds, and pay the $5-$10 transaction cost for each buy and sell.

But … what if you’re not the do-it-yourself type when it comes to investments? What if you don’t have the time, knowledge or inclination to manage your investments solo?

Mistakes. We all make them. To err is human … and all that jazz. And when your perspective includes understanding that ‘mistakes’ are not failure by any means, rather an opportunity to learn, then you dust your self off, pick your self up, and continue tweaking your approach until desired results are achieved.

Just ask Confucius, who said that, ‘our greatest glory is not in never failing but in rising every time we fail.’

More contemporary example? How about Michael Jordan, the phenomenal basketball magician: ‘I’ve missed more than 9000 shots in my career.
I’ve lost almost 300 games. 26 times I’ve been trusted to take the game winning shot … and missed. I’ve failed over and over and over again in my life. That is why I succeed.’

Learning To Crawl

As they continue to shape our world, Millennials (folks who arrived on this planet sometime in the 1980s and 1990s) are manufacturing their fair share of mistakes, no different than past generations.

Consider my Twenty-Something Nieces: independent, ambitious, career oriented, single (with doe eyed beau in tow), no kids, no car, renting, socking away some earnings into savings, and tackling whatever life throws their way. Except personal finances. In this category, they’re somewhat at sea. Not that it will make The Nieces feel any better, but there’s a whole lot of other Millennials who are also scrounging around to find solid financial ground.

Don’ts and Do’s For TwentySomethings

I’m not pointing my finger or tsk tsk-ing the Millennial crowd for their general lack of financial savvy. There’s a learning curve for whatever we do in life. But I am saying, hey, it’s helpful to take stock, assess the current state of your finances, and consider how to improve.

For starters, there are some basic actions you can take to boost your balances for today and tomorrow. These actions (listed below) will not only make you ‘feel’ more financially stable, but will actually improve your net worth.

Budgets Are SO Boring!

A budget is a roadmap, a guide, a friendly reminder as to what you may afford. Without a budget, spending is less disciplined and debt is more likely.

Sure, drafting a budget is not uno numero on your list of things to do on a sunny Saturday afternoon. Or any day for that matter. But I’m guessing that having a positive balance, and growing net worth, ranks high on the list of life goals. If yes, then set aside next Saturday for the boring task of budget drafting.

Blind Eye To Debt

You carry debt. Okay, fine. Now, what are you going to do about it?

Whatever you do, don’t make believe that the debt does not exist. I bring this up because there are some folks who abstain from reality, choosing instead to live under clouds of illusion. Debt can be a tough issue to manage. I get it. But avoiding the issue only makes your situation worse and lessens the likelihood that you’ll achieve good financial health.

Figuring out a plan to pay off your debt, that’s what is necessary. Include this plan in your budget (oh, look, the budget is already coming in handy), and determine the monthly amount to be paid toward debt reduction. Sure, the faster you can pay down debt the better. But even if you’re paying a only small amount each month, that’s something. It’s building constructive financial habits. And as long as you keep on chipping away at debt, eventually it does disappear and you won’t regret it. No one regrets paying off debt.

Sneaky Plastic

Airline Miles! $500 Cash Back! Free Hotel Night!

Financial institutions trip over themselves to offer an array of enticing credit card inducements. Why? Because they earn outrageous sums of money from interest charges.

As for you, the consumer, fact is that unless you pay the balance owing by the due date, you’ll be accumulating debt. Fast. And making financial institutions richer.

Plastic makes it too easy to give in to temptation, to buy something because you WANT it NOW. Financial institutions know this, they employ experts advising on human behaviour. And they know that there are millions of folks who have a terrible time trying to exercise self-discipline. And these folks buy STUFF they can’t afford, and they rationalize that they’ll be able to pay off the purchase before the bill arrives, and they get the bill and stick their head in the sand by making the minimum payment of ten dollars or so each month, and then incurring exorbitant interest charges.

Oy! Under NO circumstances is credit card debt a smart play.

Am I going too heavy on the chicken little act? I don’t think so. This is an issue that only seems to get bigger and bigger. Credit card debt, debt of any kind, can be a hefty psychological burden. Of course, financial too. And given enough time with too few payments, it bankrupts people.

So unless it’s absolutely essential to use plastic AND you know the full balance may be paid by due date, avoid credit cards. Instead, use a bank debit card, or a Visa / Mastercard debit card. This way, you spend only what you have since payment is debited directly from your bank account. And for you old-fashioned types, last time I checked, there’s no chance of going into debt when you pay with cash.

Dormant Dough

THE NIECES, they’re accumulating savings but they’re either not investing or investing wayyyyy too conservatively. This is a problem. And this absence of risk tolerance is unique to this generation. Some researchers posit that it’s related to the deep recession of 2007-2009, and the resulting stock market meltdown.

Whatever the reason, Millennials would be wise to loosen up. I’m not saying to roll the dice on high-risk investments. But I am saying that the 0.25% savings rate offered by your local bank isn’t going to contribute much, if any, to your financial independence.

And you would be wise to consider the stock market. Yes, it’s a volatile venue. But volatility doesn’t necessarily mean you’re walking on the wild side of risk. Especially if you’re a BuddhaMoney wise investor who doesn’t pay much attention to daily financial news headlines. Instead, focus is on the long term (5+ years), knowing that stock market returns historically beat other asset classes.

Consider that, during the past 40 years, the S&P 500 index has averaged total returns (capital gains and dividends) of close to ten per cent. Let’s say the index returns about the same for the next forty years. If so, and you invest $100 / month, in forty years your account will be worth close to $600,000.

How do you get that $100 / month? You plan for it in your Budget (see, it’s a handy little document). It doesn’t matter if it’s $25, $50, $100, or $1,000 investment account contribution. Every dollar adds up. And the thirty-something YOU, the forty-something YOU, etc, will thank twenty-something YOU for being so wise and planning for your future.

For those who do not have the time or inclination to operate a discount broker investment account, find yourself a Robo-Advisor or skilled financial advisor (not all financial advisors are cut from the same pin-striped cloth) to help manage your investments. And definitely place a healthy portion of your investment dollars in equity based Index funds, such as the Vanguard 500 Index Investor for US investors, and the Blackrock S&P/TSX 60 Index for Canadian investors.

High On Spending

In your 20s, you’re likely to start earning real money. And maybe you’re salivating at all the STUFF you can buy knowing it’s within reach: a new car, luxury condo, designer clothes. Right. But within reach doesn’t mean you may afford to buy the luxury condo.

Rather, it likely means you’re the lucky winner of a whopper of a mortgage, get to stress over making monthly payments, and go light on furniture because daily spending is tight now that housing costs eat up more than half your take home pay. Sure, you want a materially comfortable home like your parents. But you’re forgetting that your parents likely worked five, ten or twenty years before being able to afford all the cozy extras.

So for all you Impulsive Izzys, slow it down. Bring Patience into the mix. Only buy what you can afford without taking on unmanageable debt. And when you get that raise at work, this doesn’t mean you should go all ga ga and run out and buy more STUFF, or more expensive STUFF.

Instead, it means it’s time to review your Budget, allocate more money to debt reduction and investing, and then determine how best to spend discretionary funds. This is a Balanced approach to finances, one that reduces debt, increases net worth, and lets the shine sun on your financial health.

Mona and Al, wife and husband, cousins of mine, had a years long habit of buying one lottery ticket every week just for the fun of it. You know, the government sponsored buy-a-ticket-for-a-dollar-and-win-five-million kind of lottery. When they were in their 60s, they lucked into the winning number and became overnight millionaires.

They were an odd lot, these cousins. I mean, you know how they celebrated their jackpot?

First off they gave some of the money to their two adult children because they wanted to share their good fortune.

Second, a generous whack of dough was contributed to a trust fund for the eventual benefit of their several grandchildren.

Next, they splurged, inviting the entire extended family on an all expenses paid two-week cruise to Mexico.

Finally, here’s the real kicker, they didn’t buy anything for themselves! Instead, they parked the balance of their winnings in an investment account, purchasing low risk, high rated government bonds.

Socio-economically speaking, the cousins ranked somewhere in the middle class prior to their sudden windfall. But after adding up their newly acquired pot of gold, the Folks-Responsible-For-Counting-And-Ranking would easily slot them into the upper crust.

Upper crust huh? That’s not how Mona and Al saw themselves. Forget about the money. These two knew exactly who they were and had no intention of changing.

Big Spender: ‘Come on! With all that cash staring them in the face? What about buying a new home, a bigger house in an upscale neighborhood?’

You know what the cousins would say to that question? Why? Why should they buy a new house? As far as Mona and Al were concerned, there was no reason to leave the modest, comfortable 1600 square foot home where they had lived for thirty-two years, raised their children, become part of the fabric of the neighborhood.

Big Spender: ‘Hmmm. How about a new car, one of those turn-your-head-sexy-oh-my-good-buddha-I-have-to-feel-it-touch-it-smell-it-luxury models with leather seats and the latest technology?’

Nope. Their seven-year old sedan was operating well so why would they even consider trading it in for a shiny new model?

Big Spender: ‘I don’t get it! What’s the point of having money if you aren’t going to spend it?’

Imagine: being utterly content with your self and your personal relationships; grateful for the people in your life; satisfied with all the stuff you have, and not wanting more. This is what we here at BuddhaMoney like to refer to as Fulfillment.

Because you are fulfilled, the handsome seven-figure check you’re handed doesn’t make you salivate like Pavlov’s dog; and there is no craving to buy expensive stuff in an attempt to plug emotional holes. Instead, thoughts are directed toward those you love, and how you’ve been given the opportunity to enrich their lives with your generosity. And when generosity is expressed, you and those who receive your gifts all become wealthier.

Win the Lottery, Enjoy Financial Freedom … Until You Don’t

Mona and Al, two people who had their feet on the ground, head on straight, and understood what’s important in life.

Unfortunately, most lottery winners don’t fare so well. In fact, within five years of acquiring overnight riches, more than 70% of lottery winners, whether they’ve won one million or fifty million, lose ALL the money. And by ‘lose’, I mean spend and have nothing to show for it, no assets with any value, after five years.

But this little publicized statistic doesn’t stop billions of dollars being wasted on lottery tickets every year in North America. Wayyyy too many folks looking to land on the fast road to financial freedom despite the fantastic odds against winning.

Ah yes … the odds? Depending on the lottery, and how many people buy tickets, the odds average out to about 1 in 15 million! Those odds don’t qualify as a long shot or a moon shot; they’re more like a one-handed-blindfolded-behind-the-back-alley-oop-feet-stuck-in-clay-out-of-this-universe-shot. You want better perspective? Look at it this way: you’re more likely to be struck by lightning during your lifetime than you are to win the lottery.

If this is your plan, you won’t just need luck, you’ll need divine intervention. And the last time I checked, the gods aren’t terribly concerned with Earthly matters such as monetary wealth.

So, because hope isn’t a strategy, consider working out a Plan B. Like, oh, I don’t know, how about veering off to the slow lane? In other words, making the effort to learn how to save and invest so that in say, twenty years time, you’ll be the proud owner of a seven figure account balance, with financial freedom at your door step.

And that financial freedom will last the rest of your life. Because when it isn’t handed to you, when you work for it, when you know the sweat and tears and long hours and sacrifices and compromises you’ve made for the purpose of making your dreams come true, you tend to value your money. Rather than becoming a suspender snapping, cigar chomping big spender eagerly searching for ways to lose your money, you look for smart ways to save and invest and contribute to community. All of which leads to peace of mind, balance, and Mona /Al type life Fulfillment.

The Way of The Tortoise

Slow, steady, patient, self-disciplined, focused, this is the way of the tortoise who wins the race. There’s no magic, there’s no secret formula, but there are some key ingredients to building lasting wealth.

Saving

Sure, you’ve heard it a thousand times … put aside money for savings. Still, here I am repeating what others before me have said. Save your money. Make saving a habit. Because once you do so, you’re half way to becoming wealthy.

I like to think of savings as a debt I owe to myself. Meaning, every month I pay myself a certain amount. Just like I pay the monthly phone bill, I pay myself. And to reinforce the habit, I make it automatic by setting up a recurring transfer every month from my checking account into my savings account.

Our brains need this kind of help; when we don’t see the money in our checking account, when it’s not readily available, we’re less tempted to spend it.

How much you save is your decision. Of course, consider your income and expenses. Then, rather than paying yourself a dollar figure each month, pay yourself a percentage of your discretionary income, such as 10%.

And once you commit, stick with it! No creative rationalizing (i.e., but I really need to drop five grand on a vacation to Mexico and I swear I’ll make up the lost savings soon), no inventive, trivial justifications (i.e., it was a once in a lifetime sale and, really, the more I spent, the more I saved). Stay disciplined. Stay the course. Become wealthy.

Frugal Mindset

The less our expenses, the more frugal we are, the higher our savings and investments, and the larger our nest egg grows.

That said, we here at BuddhaMoney believe in a balanced approach to building wealth, a path of moderation, the Middle Way. So, sure, be frugal, but don’t let saving money dictate your every move.

If you occasionally spend over budget, and it takes you another six months, year, or two years to achieve your financial goals, but you’re getting the most out of life’s ride, well then good for you. Because while setting financial targets helps us to achieve our goals, and reaching those targets feels good, you’re missing out on life if money is your sole focus.

Expenses

Here’s what’s downright silly and damaging to your self and your path to wealth: indulging your ego with Must-Have-Brand-Names, or thinking you are impressing others with toys and trinkets. What matters is growing your assets and getting your self into a position where you may live life without money headaches, and with peace of mind.

Let me ask you this: do you know where you spend your money? Most of us don’t. But guess what? Wealthy people do. So how about you play a game with yourself: keep track of every purchase you make for the next month, both big and small. This will provide an excellent snapshot of your spending habits, and allow you to make changes beneficial to your pocketbook, investment earnings, and future financial freedom.

Investments

Once you’ve fully funded a rainy day account, your savings absolutely has to be placed in an investment account. Because this is where your money goes to work (bank savings accounts earn minimal, if any, interest), and this is how you move forward on your path to financial freedom. And if you want to pick up the pace on your path, then set up automatic, once a month transfers from savings to investment account.

If you’re a Do-It-Yourself (DIY) investor, keep investment related fees to a minimum by using a discount brokerage. For those just starting out, or who have uncomplicated investment needs, open an account with a Robo-Advisor. If you’re not the DIY type and have a complex portfolio, then consider hiring a Financial Advisor.

As for what to invest in? When you’re investing for the long term, Passive Index Funds (link) are the way to go. When compared to Actively Managed Mutual Funds, not only will fees be much lower but performance is likely to be better: research supports the finding that Index Funds typically outperform Managed Funds.

Say No to Credit Card Debt

If you can’t afford to pay the balance in full each month, then don’t make the purchase. If you carry credit card debt, you’ll be paying exorbitant interest charges on the unpaid balance, simply tossing money away, and putting financial freedom further out of reach.

Limit What You Borrow

Here’s the thing: debt sucks. If you do not have to borrow then don’t. And if a loan is, in your estimation, necessary, then borrow the absolute minimum only after you have drafted a detailed plan to pay back the borrowed funds.

Because debt payments stop you from moving toward financial freedom, and 10 out of 10 honest financial planners agree that debt is the cause of stress, headache and general dissatisfaction. Who needs that? You don’t.

So when you’re buying a house, and the bank or mortgage lender is willing to lend you a gazillion dollars, do not be impressed by their willingness to throw money at you. Do not buy more house then you need simply because you think you can.

Because when you have a mortgage, guess who owns the house? Not you. The lender. And if you take that gazillion dollar loan, and are unable to make the mortgage payments, well then, guess who gets to toss you from your home? That’s right, your friendly neighborhood lender.

Be Patient

People who become wealthy and STAY wealthy, have a long term perspective, do not act impulsively, or adopt harmful spending habits that damages their financial freedom plan. They set weekly, monthly and annual goals for them self, they remain patient, knowing their dreams need not be achieved today, and they keep the big picture in focus, i.e., achieving financial freedom.

Enter Buddha

To be patient means to trust in nature, trust in your self that life will be better every day. Whatever happens, your patience finds something good for you. Because interpreting life is a matter of perspective. There are those who see thorns on a rose bush, and those who see only the rose. So be grateful for all that you are, and all that you have today, and trust that the path you choose will eventually lead to your goals.

The Meaning of Wealth

Warren Buffet, the second wealthiest person in the world coming in at a hefty $72B (USD), does not measure success by dollars. In 2016, he donated $2.84 Billion to charity. To date, he has given away more than $21 Billion. And when his number is called, he has pledged to give away 99% of his wealth.

He’s a guy who just goes about his business, getting the job done, and loving what he does.

Balanced and emotionally fulfilled, he doesn’t need to prop up his ego by plastering his name on sports stadiums, hospitals, universities or any other buildings. Here’s what he has to say about those who demand their name on a building in exchange for a chunk of money:

“I know people who have a lot of money and they get testimonial dinners and hospital wings named after them. But the truth is that nobody in the world loves them. When you get to my age (i.e., 86), you’ll measure your success in life by how many of the people you want to have love you, actually do love you. That’s the ultimate test of how you’ve lived your life.”

I’m guessing that Warren would have gotten along quite well with Mona and Al.

Books To Learn From

For those who want to learn more about stepping on the path toward building wealth, here’s some worthwhile guidance:

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